JOCK FINLAYSON
The following piece by ICBA Chief Economist Jock Finlayson, in his role as a Senior Fellow of the Fraser Institute, was first published in the Toronto Sun on August 7, 2024.
BRITISH COLUMBIA – Canada is losing corporate head offices. Between 2012 and 2022, one-in-20 head offices closed or merged with other companies, according to Statistics Canada data, which track the number of large and mid-sized Canadian-based companies over time. Head office employment has also dwindled, dropping by around 6 per cent since 2012.
While Canadian corporate headquarters are concentrated in Ontario, Quebec, Alberta and British Columbia, almost all provinces have lost head offices since 2012. In some cases, this can be attributed to energy companies exiting, merging or scaling back their operations in Canada following the plunge in oil prices from 2014 to 2016 and the emergence of an investment-chilling federal regulatory environment. That said, the decline in corporate headquarters and related employment has been broadly-based.
Why should Canadians care?
Head offices serve as “command and control centres” for key decisions about people, products, processes, technologies and strategies for growth. They create local demand for services such as accounting, law, engineering, management consulting, finance and advertising. People who work in these supplier industries, like those employed directly by companies’ headquarters, also earn above-average wages and salaries. A robust head office sector bolsters the tax base to help pay for public services. It also has a positive impact on the extent of private-sector support for education, health care, and arts and charities.
What can be done? Canada has little prospect of “poaching” head offices from elsewhere. Indeed, there is a risk that some Canadian companies in sectors such as energy, forestry, technology, and pipelines could relocate their headquarters to the United States. Instead, policymakers should ensure that Canada has a business environment that helps retain head offices and creates opportunities for more local firms to scale into larger enterprises.
Unfortunately, Canada is hamstrung by a poor policy environment for business growth, including an antiquated tax system that defies understanding even by the most skilled tax accountants, complex and inefficient regulatory processes affecting many industries, internal trade barriers that fragment the domestic market, heavy direct government involvement in multiple sectors of the economy, and a federal government that seemingly lacks interest in doing much to improve the efficiency and productivity of the national economy.
For example, the combined federal-provincial business tax rate doubles or triples if companies grow their net income above a modest level (typically, $500,000). Provincial payroll taxes kick in at thresholds that encourage “micro-businesses” and impose higher tax burdens on mid-sized companies. Research and development tax credits are skewed to benefit very small businesses. Canada also levies high personal tax rates at relatively low income thresholds compared to most other advanced economies, including the U.S. and the United Kingdom. The most skilled employees—managers, professionals, scientists, technologists and so on—are internationally mobile. Many can and will leave Canada for better opportunities in other jurisdictions.
In truth, Canada today is not a particularly attractive location to situate head office jobs, nor to undertake the kind of high-value corporate activities that depend on the presence of senior management and deep pools of professional and technical talent.
Canada cannot afford to see the continued loss of head offices. Governments at all levels should enact policies to support a strong head office sector. And they should avoid taking steps that will spur a further exodus of successful Canadian companies and our most talented people.
Source: ICBA
